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Hindenburg Omen – Don’t Believe the Hype

by Darwin on August 15, 2010

The Hindenburg Omen is upon us. What is this dreaded scourge you ask? Well, it’s supposedly the equivalent of financial Armageddon reigning down upon us mere mortals. An otherwise obscure blind mathematician by the name of Jim Miekka has postulated that when several sets of financial factors and ratios all align negatively, that is the key predictor for a significant market correction. You’ll hear a lot about this prediction this coming week if you haven’t already, since these key indicators all recently fell into place last week.

What is the Hindenburg Omen?

The Omen is expected to occur during the confluence of the following 5 events:

1. The daily number of NYSE new 52 Week Highs and the daily number of new 52 Week Lows must both be greater than 2.2 percent of total NYSE issues traded that day.
2. The smaller of these numbers is greater than or equal to 69.
3. The NYSE 10 Week moving average is rising.
4. The McClellan Oscillator is negative on that same day.
5. New 52 Week Highs cannot be more than twice the new 52 Week Lows (however it is fine for new 52 Week Lows to be more than double new 52 Week Highs).

Does the Hindenburg Omen Matter?

In my mind, no. While these criteria are often met prior to severe market crashes, they are ALSO met when nothing happens. It is estimated that this omen has only come to fruition 25% of the time! Granted, I’ll still make a trip to the casino now and then knowing the house has a 2% advantaged at Blackjack. But a 25% advantage? That’s not for me. If anything, perhaps some of the press and hype the omen will get this week will give some investors pause and stocks will decline as a result, I’m not altering my long-term investment strategy as a result, for if I did, I would have missed prior positive runups and we all know retail investors lose when they try to time the market.

I’ll give the Hinds some credit. At least there’s some data tied to it. Most Omens are bogus, like the people thinking the reckoning was upon us for Y2K, 2012, etc. even though most experts believe we don’t even have the date of Christ’s real birth or death accurately anyway since his whole story was written hundreds of years after his existence, so basing end of days omens on the common Gregorian calendar is rather silly. Americans just love a good conspiracy and the press loves hype. So, rather than hyping, I’m skeptical.

Where Did the Name Come From?

The foreboding name was apparently conceived by Miekka’s colleague who, while searching for a really scary sounding name, realized that the Titanic was already taken, so they went with the next best thing – The Hindenburg Omen. See, the thing is, the Hindenburg didn’t rise 70% within 9 months after it crashed, but the S&P500 did last year :>

For people who don’t feel like reading the article, there are two paragraphs that I wanted to highlight in particular:

1) “If we define a crash as a 15% decline , of the previous 26 confirmed Hindenburg Omen signals, seven (27.0 percent ) were followed by financial system threatening, life-as-we-know-it threatening stock market crashes. Three (11.5 percent) more were followed by stock market selling panics (10% to 14.9% declines). Four more (15.4 percent) resulted in sharp declines (8% to 9.9% drops). Six (23.0 percent) were followed by meaningful declines (5% to 7.9%), four (15.4 percent) saw mild declines (2.0% to 4.9%), and two (7.7 percent) were failures, with subsequent declines of 2.0% or less. Put another way, there is a 27 percent probability that a stock market crash — the big one — will occur after we get a confirmed (more than one in a cluster) Hindenburg Omen . There is a 38.5 percent probability that at least a panic sell-off will occur. There is a 53.9 percent probability that a sharp decline greater than 8.0 % will occur, and there is a 76.9 percent probability that a stock market decline of at least 5 percent will occur. Only one out of roughly 13 times will this signal fail.”

2) “What does it mean for traders and investors when we get a confirmed Hindenburg Omen? This is really important to understand. A confirmed Hindenburg Omen is not a guarantee of a stock market crash. The odds of a crash based upon the history since 1985 is 27.0 percent. That means the odds we will not have a crash are quite high, at 73.0 percent. However, since a stock market crash is akin to economic death in many circles, you can look at the situation like this. If you were hearing from your doctor that the surgery you are contemplating stands a 27.0 percent of you dying, that becomes a very high percentage probability – one you likely do not want to take if the surgery is not absolutely necessary. A 27.0 percent probability of a stock market crash is extremely high when you consider that there have been only seven over the past twenty-two years…”

Reading that article I noticed something: Once this ‘omen’ has been triggered, the market doesn’t go up (and if it did, it fell shortly afterwards, overall having a drop). I am basing that off the chart and looking up a few of the past ‘omen signals’, so that statement might not be entirely accurate.

To me, this was just more of a confirmation to what I suspect is going to happen (if things don’t change). We don’t appear to be doing anything significant to naturally grow ourselves out of this rut, FED is simply propping the economy up and they are running out of weapons in their arsenal, etc etc.

I am pretty new to investing, so please take it easy on me if I am off base or if there are other obvious external factors that I am not taking into account. I just wanted to provide this information to readers as it was a bit difficult to find. Also if you had any extra input that would be great.
Thanks again.